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May 24, 1999

Outsourcing Deals Without Competition

Sole-sourcing often prevails, study says

By Bruce Caldwell

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Computer Sciences Corp. study of outsourcing contracts worth more than $100 million each shows that the majority of the dollars awarded to vendors last year were won without any competitive bidding.

CSC looked at market analysis and publicity of all outsourcing megadeals in the past two years and found that 63% of the total dollars represented by the contracts was sole-sourced last year, up from 37% in 1997, according to Gerry Dubé, president of CSC's Integrated Business Services unit.

The competitive-bidding process in major outsourcing deals can cost vendors hundreds of thousands--even millions--of dollars, costs that eventually must be passed on to customers. The process of reviewing vendor proposals is also a major time and cost commitment for client companies. Sole-sourcing, which awards outsourcing contracts based on relationships instead of competition among vendors, can eliminate much of the costs involved for all parties.

Enron Energy Services decided to sole-source an 11-year, $1.1 billion contract to CSC for electronic-business technologies and back-office administrative functions after it issued a request for proposals and narrowed a field of eight vendors to three. Sole-sourcing the contract helped expedite the outsourcing process and let the companies quickly focus on the complexities of the deal, which involved transferring assets and 320 employees to CSC.

But vendors aren't necessarily on a level playing field when it comes to the relationships that can lead to sole-sourced contracts. "We don't have the relationship base that IBM does," Dubé says. IBM won several multibillion-dollar sole-sourced contracts last year, including deals from GE Capital and AT&T.

Sole-sourcing can also be risky for clients. Dennis McGuire, president of Technology Partners International, an outsourcing consulting firm, says that when the CEOs of a client company and an outsourcing vendor agree to a deal, there's a chance that too many details will be left until the last minute.